Intermediate Accounting, 9e (Spiceland)
Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and
Disposition
1) The three factors in cost allocation of a depreciable asset are service life, allocation base, and
allocation method.
2) The physical life of a depreciable asset is bounded by its service life.
3) Any method of depreciation should be both systematic and rational.
4) Total depreciation is the same over the life of an asset regardless of the method of
depreciation used.
5) Advocates of accelerated depreciation methods argue that their use tends to level out the total
cost of ownership of an asset over its benefit period if one considers both depreciation and repair
and maintenance costs.
6) Activity-based methods of depreciation are appropriate for assets whose service life is a
function of use rather than time.
7) Once selected for existing assets, a company must consistently use the same method of
depreciation for all subsequent fixed asset acquisitions.
8) Under group and composite depreciation methods, gains and losses on the disposal of
individual assets need not be computed.
9) Statutory depletion is the maximum amount of depletion that may be reported in financial
statements prepared according to GAAP.
10) A change in the estimated recoverable units used to compute depletion requires retroactive
adjustments to the financial statements.
11) Changes in the estimates involved in depreciation, depletion, and amortization require
retroactive restatement of financial statements.
12) Property, plant, and equipment and finite-life intangible assets must be tested for impairment
at least once a year.
13) International Financial Reporting Standards (IFRS) require goodwill to be tested for
impairment at least annually.
14) According to International Financial Reporting Standards (IFRS), property, plant, and
equipment must be valued at cost less accumulated depreciation.
15) Component depreciation, required under International Financial Reporting Standards (IFRS),
is allowed but rarely used by U.S. companies.
16) Biological assets are valued at fair value less estimated costs to sell under International
Financial Reporting Standards (IFRS).
17) According to International Financial Reporting Standards (IFRS), an impairment loss for
property, plant, and equipment is required only when an asset’s book value exceeds the
undiscounted sum of the asset’s estimated future cash flows.
18) According to International Financial Reporting Standards (IFRS), the impairment loss for an
indefinite-life intangible asset other than goodwill is the difference between book value and the
recoverable amount.
19) According to International Financial Reporting Standards (IFRS), the costs to successfully
defend an intangible right normally are capitalized and amortized.
20) MACRS (modified accelerated cost recovery system) depreciation is equivalent to sum-of-
the-years’ digits depreciation.
21) By the replacement depreciation method, depreciation is recorded when assets are replaced.
22) The factors that need to be determined to compute depreciation are an asset’s:
A) Cost, residual value, and physical life.
B) Cost, replacement value, and service life.
C) Fair value, residual value, and economic life.
D) Cost, residual value, and service life.
23) The allocation base for an asset is:
A) Its service life.
B) The excess of its cost over residual value.
C) The difference between its replacement value and cost.
D) The amount allowable under MACRS.
24) An asset that has an estimated physical life of six years and an estimated service life of four
years should be depreciated over:
A) Four years.
B) Five years.
C) Six years.
D) Any of these choices can be chosen by management.
25) Depreciation, depletion, and amortization:
A) All refer to the process of allocating the cost of long-term assets used in the business over
future periods.
B) All generally use the same methods of cost allocation.
C) Are all handled the same in arriving at taxable income.
D) All of these answer choices are correct.
26) Which of the following typically refers to the process of allocating the cost of long-term
intangible assets used in the business over future periods?
A) Depreciation.
B) Amortization.
C) Depletion.
D) Impairment.
27) Which of the following typically would cause the service life of an asset to be less than its
physical life?
A) The company no longer provides the products or services associated with the use of the asset.
B) Suppliers may develop new technologies that are more efficient.
C) The expected rate of technological change may shorten service life.
D) All of these answer choices are correct.
28) The allocation base of an asset refers to which of the following?
A) The asset’s initial capitalized cost.
B) The number of years over which the asset’s cost will be allocated.
C) The asset’s initial capitalized cost minus residual value.
D) The method used to allocate the asset’s cost across years.
29) The overriding principle for all depreciation methods is that the method must be:
A) Conservative and economic.
B) Systematic and rational.
C) Consistent and conservative.
D) Significant and material.
30) Depreciation:
A) Is always considered a period cost.
B) Could be a product cost or a period cost depending on the use of the asset.
C) Is usually based on the declining-balance method.
D) Per books is usually higher than MACRS in the early years of an asset’s life.
31) Assuming an asset is used evenly over a four-year service life, which method of depreciation
will always result in the largest amount of depreciation in the first year?
A) Straight-line.
B) Units-of-production.
C) Double-declining balance.
D) Sum-of-the-year’s digits.
32) In the first year of an asset’s life, which of the following methods has the smallest
depreciation?
A) Straight-line.
B) Declining balance.
C) Sum-of-the-years’ digits.
D) Composite or group.
33) An asset acquired January 1, 2018, for $15,000 with an estimated 10-year life and no
residual value is being depreciated in an equipment group asset account that has an average
service life of eight years. The asset is sold on December 31, 2019, for $6,000. The entry to
record the sale would be:
A)
Cash
6,000
Loss on sale of equipment
9,000
Equipment
15,000
B)
Cash
6,000
Equipment
6,000
C)
Cash
6,000
Accumulated depreciation
3,750
Loss on sale of equipment
5,250
Equipment
15,000
D)
Cash
6,000
Accumulated depreciation
9,000
Equipment
15,000
34) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, depreciation for 2018 would be:
A) $13,200.
B) $14,400.
C) $72,000.
D) None of these answer choices are correct.
35) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, the book value at December 31, 2018, would be:
A) $57,600.
B) $51,600.
C) $58,800.
D) $52,800.
36) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, depreciation for 2019 and the equipment’s book value at
December 31, 2019, would be:
A) $14,400 and $43,200 respectively.
B) $28,800 and $37,200 respectively.
C) $13,200 and $39,600 respectively.
D) $13,200 and $45,600 respectively.
37) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the double-declining balance method, depreciation for 2018 and the book value at
December 31, 2018, would be:
A) $26,400 and $45,600 respectively.
B) $28,800 and $43,200 respectively.
C) $28,800 and $37,200 respectively.
D) $26,400 and $36,600 respectively.
38) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the double-declining balance method, depreciation for 2019 would be:
A) $28,800.
B) $18,240.
C) $17,280.
D) None of these answer choices are correct.
39) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the double-declining balance method, the book value at December 31, 2019, would be:
A) $14,400.
B) $24,960.
C) $27,360.
D) $25,920.
40) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the sum-of-the-years’-digits method, depreciation for 2018 and book value at December
31, 2018, would be:
A) $22,000 and $44,000 respectively.
B) $22,000 and $50,000 respectively.
C) $24,000 and $48,000 respectively.
D) $24,000 and $42,000 respectively.
41) Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is
expected to have a five-year life and a residual value of $6,000.
Using the sum-of-the-years’-digits method, depreciation for 2019 and book value at December
31, 2019, would be:
A) $19,200 and $30,800 respectively.
B) $17,600 and $26,400 respectively.
C) $19,200 and $28,800 respectively.
D) $17,600 and $32,400 respectively.
42) On June 30, 2018, Prego Equipment purchased a precision laser-guided steel punch that has
an expected capacity of 300,000 units and no residual value. The cost of the machine was
$450,000 and is to be depreciated using the units-of-production method. During the six months
of 2018, 24,000 units of product were produced. At the beginning of 2019, engineers estimated
that the machine can realistically be used to produce only another 230,000 units. During 2019,
70,000 units were produced.
Prego would report depreciation in 2018 of:
A) $36,000.
B) $43,900.
C) $18,000.
D) $21,950.
43) On June 30, 2018, Prego Equipment purchased a precision laser-guided steel punch that has
an expected capacity of 300,000 units and no residual value. The cost of the machine was
$450,000 and is to be depreciated using the units-of-production method. During the six months
of 2018, 24,000 units of product were produced. At the beginning of 2019, engineers estimated
that the machine can realistically be used to produce only another 230,000 units. During 2019,
70,000 units were produced.
Prego would report depreciation in 2019 of:
A) $135,230.
B) $126,000.
C) $108,000.
D) $105,000.
44) Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the straight-line method, depreciation for 2018 and book value at December 31, 2018,
would be:
A) $10,000 and $30,000.
B) $11,250 and $28,750.
C) $10,000 and $35,000.
D) $11,250 and $33,750.
45) Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the straight-line method, depreciation for 2019 and book value at December 31, 2019,
would be:
A) $10,000 and $20,000.
B) $10,000 and $25,000.
C) $11,250 and $17,500.
D) $11,250 and $22,500.
46) Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining balance method, depreciation for 2018 and book value at December
31, 2018, would be:
A) $22,500 and $22,500.
B) $22,500 and $17,500.
C) $20,000 and $25,000.
D) $20,000 and $20,000.
47) Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining balance method, depreciation for 2019 and book value at December
31, 2019, would be:
A) $10,000 and $5,000.
B) $10,000 and $10,000.
C) $11,250 and $6,250.
D) $11,250 and $11,250.
48) Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the sum-of-the-years’-digits method, depreciation for 2018 and book value at December
31, 2018, would be:
A) $18,000 and $27,000.
B) $16,000 and $29,000.
C) $16,000 and $24,000.
D) $18,000 and $22,000.
49) Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is
expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the sum-of-the years’-digits method, depreciation for 2019 and book value at December
31, 2019, would be:
A) $13,500 and $13,500.
B) $13,500 and $8,500.
C) $12,000 and $17,000.
D) $12,000 and $12,000.
50) On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The
estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year
depreciation based on the number of months in service.
Depreciation for 2018, using the straight-line method is:
A) $13,500.
B) $15,000.
C) $4,500.
D) $5,000.
51) On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The
estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year
depreciation based on the number of months in service.
Depreciation for 2018, using the double-declining balance method, would be:
A) $40,000.
B) $10,000.
C) $36,000.
D) $9,000.
52) On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The
estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year
depreciation based on the number of months in service.
Depreciation for 2019, using the double-declining balance method, would be:
A) $32,000.
B) $34,000.
C) $38,000.
D) $40,000.
53) On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The
estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year
depreciation based on the number of months in service.
Depreciation (to the nearest dollar) for 2018, using sum-of-the-years’ digits method, would be:
A) $9,091.
B) $24,545.
C) $27,273.
D) $8,182.